With the predictions for this winter’s energy prices growing higher by the month, experts and politicians are wrangling over the best way to help Britain’s households to weather the storm.
But with the leadership of the Conservative Party still undecided, it is far from certain which strategy will be adopted. Here are the top contenders and how they might affect your bills.
Option one: A further £400 cut in bills funded by the Treasury
What is it?
Everyone will already receive a £400 reduction in energy bills this winter. The existing plans take £66 off every consumer’s bill between October and December and then £67 between December and March.
This scheme would take off another £400, by removing an allowance that energy companies can charge consumers and replacing it with government financing1.
Who is suggesting it?
Chancellor Nadhim Zahawi is said to be drawing up the plans to be ready for whoever takes the reins of the Conservative Party on September 5.
Who would receive this help?
Everyone would benefit from the move, but unlike the current £400 reduction, which is applied directly to everyone’s energy account regardless of usage, this refinancing would have the result of ensuring the energy price cap moves to a lower level than would otherwise occur.
Higher users would therefore benefit more than lower users from lower prices per unit.
How much difference would it make?
Given that the price cap for energy is expected to rise so that average consumers pay the equivalent of £3,500 a year from October and more than £4,200 in January, the plan would not stop energy prices being painfully high, but the pain would be less.
Option two: Freezing the energy price cap
What is it?
A plan to keep the energy price cap, which regulates how much energy companies can charge, at the equivalent of £1971 a year for the average consumer.
Who is suggesting it?
Energy providers, including Octopus and Centrica, believe this freezing could be achieved by creating an emergency government fund, and paying the money back over a longer period2.
Labour opposition leader Keir Starmer, who also backs freezing the cap, believes it could be funded by reduced debt payments due to lower inflation as well as money already earmarked to deal with the energy crisis3.
Who would receive this help?
The cap would be frozen for everyone regardless of income or usage. If you are still on a fixed tariff, even if it is above the cap, you are unlikely to benefit.
How much difference would it make?
Freezing the cap at this level would stop even greater energy bill pain when the price cap is due to be increase in October and again in January. However, it would not reverse the rise seen in October which is likely to be painful as winter kicks in.
Option three: removing the green levies on bills
What is it?
Energy companies pay levies to fund the development of further renewable energy sources. Removing these levies, whether permanently or temporarily, could result in lower bills for customers under this plan.
Who is suggesting it?
Leadership favourite Liz Truss is suggesting this as a solution to the energy crisis.
Who would receive this help?
It is assumed that everybody would benefit from the lower prices, although Truss seems likely to pair the plan with targeted help for those on lower incomes4.
How much difference would it make?
Only about £150 per household – a drop in the ocean compared with the price rises.
Option Four: Removing VAT on energy
What is it?
At present we pay VAT (Value Added Tax) on all our energy at a rate of five per cent. By changing the rules so that energy bills are zero rated for VAT we could pay less for energy, but the government would receive less tax.
Who is suggesting it?
Leadership candidate Rishi Sunak originally said he would not cut any taxes before deciding to suggest a VAT cut for energy as forecasts for winter price rises grew higher.
Who would receive this help?
Everyone who uses energy would benefit from the cut in proportion to the amount of energy they use.
What difference would it make?
Around £150 off the average household energy bill – again welcome but not making up for the rises in price.
What happens next?
While the Conservative Party votes on a new leader, little is likely to happen in terms of definitive energy policy. This may mean it is too late for much to be put in place ahead of the next rise in prices, which kicks in on October 1.
However, it may be possible for more changes to be put in place before January when the cap changes again.
With the future uncertain and an expensive winter ahead of us, ensuring your home is well insulated, and that you are taking regular meter readings to monitor your energy use could help this winter.
Whatever happens, it seems unlikely that any plan is going to bring energy prices down any time soon, so getting your own usage under control is the most effective thing you can do to help yourself.
1 https://www.thetimes.co.uk/article/plan-cut-extra-400-off-fuel-costs-769flv8s0
2 https://www.theguardian.com/business/2022/aug/15/centrica-and-octopus-back-plan-to-freeze-uk-energy-bills-for-two-years
3 https://www.independent.co.uk/news/uk/politics/starmer-labour-energy-bills-fr.ze-b2144893.html
4 https://www.independent.co.uk/news/uk/politics/energy-bills-liz-truss-labour-b2146066.html